An Analysis of Short Selling, Margin Purchasing, and Bid-ask Spreads around Illegal Insider Trading: Evidence from Taiwan

This study examines margin trading activities and bid-ask spreads around companyspecific news announcements, in which insiders were convicted of illegal trading on nonpublic information in the Taiwan stock market. We find significant excess short sales (margin purchases) before bad (good) news announcements. Results indicate that abnormal short selling (margin trading) is significantly and negatively (positively) related to postannouncement stock returns. Furthermore, our results show that short selling and margin purchasing increase pre-announcement bid-ask spreads and decrease market liquidity.